We initiate a BUY recommendation on Samudera Shipping Line with a price target of S$0.49, based on 1.0x FY21 P/B ratio, representing a 60% discount to peer average of 2.5x P/B, and a 75% upside to current price.
Samudera's historical dividends have been extremely consistent, with a pay-out policy of at least 20%. However, we find that Samudera has always paid well above its policy, and even paid dividends when they were loss making back in 2016. Based on our projection of Samudera’s profitability, dividends declared should come in at 1.5 Scts in FY2021, based on an estimated payout ratio of 30%. This represents 5.5% yield based on the current market price. |
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We also think that based on the economic tailwinds generated by Covid-19, profit-making vessels, and that almost all of its peers trade substantially above book, Samudera has little reason to be trading below book.
Given consistent dividend pay outs historically, the increased dividends from Samudera’s profitability should also be one of the key catalysts for further price discovery.
Covid-19 is the perfect storm for the recent boom in the container shipping industry.
On the demand side, penetration of e-commerce has soared due to lockdown measures, resulting in increased need for container shipping. On the supply side, there exists reduced capacity due to port congestions and lack of manpower to work the docks. This bottleneck has caused a surge in freight rates, a direct revenue driver for Samudera.
The reason we chose Samudera versus other shipping firms is as such - While the container shipping industry has soared, along with its stock prices, Samudera remains a laggard.
Stock prices of some of its peers have soared c.15x from its 52 weeks low, but Samudera’s share price has barely reached c.3x from market lows.
As such, we think that Samudera can and should trade at a much higher price as it has still room to grow.
| Samudera’s balance sheet is robust and is in a net cash position that represents c.50% of their market cap. They have conscientiously improved their balance sheet by disposing, changing to chartered vessels, and abolishing unprofitable routes. Unlike its heavily geared peers, Samudera has no immediate threat of solvency issues should another crisis happen. The shipping container industry has been plagued with over supply issues for many years, and Covid-19 provides a chance for shipping firms to increase their profitability. As such, we are cognizant that when the threat of Covid-19 is reduced due to vaccines rollout, the supernormal profits of the shipping industry will mean revert back to normal with lock downs being lifted and ports get less congested. For now, we think Samudera presents an opportunity for a cycle play for 2021. |
Samudera is part of Samudera Indonesian Group, and is an experienced container shipping operator with more than 20 years of operations in Asia. It operates under 3 segments: Container Shipping, Bulk and Tanker, and Logistics. Geographically, Samudera serves the SEA markets, with bulk of its revenues coming from Indonesia (26.5%) and SEA ex. Indonesia (45.3%).
